Income going up, and losing tax credits

[Ives]

I wondered if other people think about this and what they do about it.  If you have a low income and kids, you get a huge tax refund. If your income goes up and then passes $51,000 something, from what I've read, you lose that tax credit.   So if I'm taking on a couple extra jobs, and go past that amount it's not worth those extra jobs unless I make MORE than my old income plus the tax refund plus taxes (because the tax refund doesn't have taxes taken off but income does.)  So I'd need to work enough hours and jobs to make LOTS more than I would if I just stuck with the one job and tax refund, to make it worth it.  I'm talking crazy hours like my husband 5:30am to 10pm and me 6am to noon, plus I have kids at home. Does this make sense to anyone? I'm so confused and am trying to make sense of it. I don't know if this is the kind of forum where people assume things out of their own heads and judge you, and this is probably written in a confusing way, so please be gracious and if you want to be a jerk, please don't do it here!

[Catbert]

I know nothing specific about Saver's Credit, so here's some generic advice:

Play a bit with a mock tax return.  See which line needs to be under 51K.  Is it gross income?  Taxable income?  Something else?  Is there a way you can influence that number other than earning less money?  For example, if it's taxable income then contributing more to a 401k or traditional IRA could help keep you under 51K.   If taxable income have you looked at what the new 2018 tax scheme will do regarding standard deduction.

Maybe someone with more detailed knowledge will chime inl.

[secondcor521]

I'd encourage you to learn about taxes directly from the IRS website and playing around with tax filing products rather than what you might hear from friends or news headlines.  It can be a bit overwhelming at first, but go through it bit by bit, line by line and figure it out.  If you understand how your taxes work you'll be in a much better position to evaluation your options.  Friends and news headlines might try to be helpful but they're often misinformed, incomplete, or simply not applicable to your situation.

It is true that there are some tax cliffs where earning a little more money can result in a large increase in taxes.  However, to the best of my knowledge, for someone who is married with kids and an income of about $51K, there aren't any.

It sounds like what you read has to do with the EITC.  For a couple who are filing jointly with two kids, the maximum allowable income is $50,597 for 2017.  And the EITC can be up to several thousand dollars.  But it is a phaseout, so the only way to get that large of a tax credit is to have a very low income (like about $16K).  The closer you get to that $50,597 number, the smaller your EITC credit will be.  For example, if a couple with two kids has an income of $50,500, their EITC will be only $15.

The point is, there is no $51K cliff where earning $50,999 means you pay nothing and earning $51,001 means you pay $5,000.  It's all gradual.

I used the EITC calculator at the IRS website here:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant

[MDM]

I just looked at the difference between 50k and 51k in earned income (no interest/dividends or other income, no savers credit) for a married couple with two dependents under age 16 using this calculator (which has the new deduction amounts for 2018):

https://www.olt.com/main/home/taxestimator.asp

For 50k in income, you pay $0 in federal tax -- the entire tax owed ($4370) is wiped out by the EIC and child tax credits.

For 51k in income, you pay $20 in federal tax -- you get a tax credit of $4500 and pay the $20 owed over that.

If you bump income up to $60k, your tax owed goes up to $6500, but you still get the $4500 credit, so you pay $2000.

For $50K income in this situation,
taxable income = $26K
tax on that is ~$2739
the non-refundable CTC wipes out the $2739, leaving tax owed = $0
a $314 EIC and refundable CTC of either $61 or $1261 (depending on the yet-to-be published implementation details) means the IRS will send a check for either $375 or $1575.

For $60K income in this situation,
taxable income = $36K
tax on that is ~$3939
the non-refundable CTC wipes out the $3939, leaving tax owed = $0
There is no EIC and the refundable CTC is either $0 or $61 (depending on the yet-to-be published implementation details) so there will either be no tax due or refunded, or the IRS will send a check for $61.

See the case study spreadsheet for those calculations.  I had a 2 in all cells Calculations!G2:G6, 35 in G8:H8, and used B3 for the income.  These are 2018 taxes.

Paycheck frequency:	Annual	Annual
Paycheck Items	Earner #1	Earner #2	Annual
Gross Salary/Wages	$50,000	$0	$50,000
W-2 Box 1	$50,000	$0	$50,000
1040 AGI			$50,000
Payroll Taxes	Annual	Annual	Annual
Social Security	$3,100	$0	$3,100
Medicare	$725	$0	$725
Income Taxes
Federal tax	-$1,575	2018, MFJ, std., 2 dep	-$1,575
Total income taxes	$2,250		$2,250
	Monthly
Income before other expenses	$3,979		$47,750

Filing Status	2	1=S, 2=MFJ, 3=HOH
# Dependents	2
# Children <17	2
# Children <13	2
# Children for EIC	2
	Adult #1	Adult #2
Age	35	35
Full-time student?	0	0
AGI	$50,000
Std. Deduct.	$24,000
Act. Deduct.	$24,000
Pass-thru deduct.	$0
Taxable	$26,000
1040 Tax	$2,739
Non-refund. CTC	$2,739
Tax after n-r credit	$0
EIC	$314
Refundable CTC	$1,261
Net Tax	-$1,575
Version	V11.16

[Michael in ABQ]

As others have mentioned as your income goes up certain tax credits get phased out. At the end of the day I'd rather be making $75k and receive zero tax credits than making $35k and getting $5k in free money from the government. The first few years after college with a single income and a couple of kids we qualified for the EITC and at times our effective tax rate was about -10%. Then as my income increased it went up to around 0% and now it's maybe 10% once you take child tax credits into account. Sure we no longer qualify for the EITC or saver's tax credit but I'd rather be earning a higher income than relying on welfare.

While the EITC phases out once you start making a decent amount of money the new $2,000 child tax credit doesn't phase out until you're well in to the 6-figure range.

[kpd905]

At the end of the day I'd rather be making $75k and receive zero tax credits than making $35k and getting $5k in free money from the government.

Sure, that is obvious.  But I think OP is thinking they might go just over the threshold, rather than $40,000 over it.  Which means they make $5k in extra income and maybe lose $5k in tax credits, effectively wasting their time.

Looks like going from 51k to 60k in one of the above scenarios causes a 22% effective tax rate, plus state tax and FICA.  So it would be up to OP whether the additional work is worth the effort.

[MDM]

Sure, that is obvious.  But I think OP is thinking they might go just over the threshold, rather than $40,000 over it.  Which means they make $5k in extra income and maybe lose $5k in tax credits, effectively wasting their time.

An increase in W-2 (or self-employment) earnings won't cause that with the Earned Income Credit (EIC).  What can make the EIC go away with $1 more is interest/dividends/capital gains/rental income: any investment income >$3500 means no EIC.

Another "step change" (aka "tier") occurs with the saver's credit.

Looks like going from 51k to 60k in one of the above scenarios causes a 22% effective tax rate, plus state tax and FICA.  So it would be up to OP whether the additional work is worth the effort.

The phase-out rate of the EIC with two children is a little over 21%.  That applies when the greater of AGI or (W-2 plus self-employment) is between $24,350 and $51,492.  Add that to the nominal tax bracket, and any other phase-outs, tiers, etc. to get the marginal rate.

Speaking of marginal rates, the interpretation of the new CTC will have a large impact on the OP's situation.

The charts below show marginal rates for W-2 income above $30K assuming

1) Optimistic CTC interpretation, no IRA contribution:


2) Optimistic CTC interpretation, $2K IRA contribution from each spouse:


3) Pessimistic CTC interpretation, no IRA contribution


4) Pessimistic CTC interpretation, $2K IRA contribution from each spouse: